For variable loans a variable interest rate is used. is the interest portion of the benefit rate, the repayment portion of the repayment installment. The interest rate is fixed during the term of the loan. The interest rates at which banks pass on their credit to the end customer are the lower the lower the policy rate. Annual Effective Interest Rate: The Benefits of Variable Rate Loan: As interest rates fall, you benefit from the resulting interest rate cut on your own loan.
The idea behind fixed interest rates
The interest obligation, also called lending obligation, describes an interest rate hedge agreed between borrower and lender. This fixation (fixed rate period) is maintained over a predetermined time horizon, so that the debit interest can not be changed by the contractors. This means that interest rate changes on the world financial market have no influence on the loan or the loan agreement.
The borrower knows in advance that the monthly repayment can not change, but the banks know that they will receive some interest on the loan over a certain period of time. The fixed interest rate is recognized by both parties, which means that no changes to the target interest rate are possible as a result of the agreement. As a rule, after the end of the so-called fixed interest period, the “residual debt” of the loan remains, so that the due date must be selected only after the loan has been fully repaid.
At the end of the period, the following payout phase begins. Again, the interest rates can be set accordingly. As a rule, the contracting parties agree on a period of 5, 10 or even 15 years. A popular appointment is the 10-year fixation. The reason for the corresponding regulation lies in the currently extremely low interest rates on the capital market and the potential for renewed uncertainty.
The lender sometimes charges a higher interest rate than was previously available, but it is beneficial to the borrower for the term. Because one can assume that the extremely low interest rates will not last for a longer period of 5, 10 or 15 years.
The borrower has the decisive edge when it comes to setting interest rates: he knows in advance what burdens he will face in the coming 5, 10 or 15 years. Monthly lending rates remain the same as it is not possible to raise or lower interest rates. This allows the borrower a better calculation and does not experience any unpleasant surprises.
The rise in interest rates is to be expected with a probability of almost zero. However, it has to be taken into account that an increase in interest rates on the world market is only a matter of time. It is clear that credit institutions will also receive a slightly higher interest rate in the coming weeks or years than previously provided for on the capital market.
Because the slight increase in interest rates can also be seen as a so-called “hedge” for the debtor. For example, anyone who wants to repay or terminate their loan prematurely must pay a so-called early repayment penalty. Depending on the credit agreement, however, a special repayment is possible. Therefore, if special loan repayments are granted in the loan agreement, the borrower has the option of making a special payment, thus shortening the entire duration of the financing.
It should be noted that a lower interest rate is foreseen in the case of a longer commitment. If the fixed interest period is shorter (eg five years), the interest rate can be significantly increased. However, the borrower must calculate the individual options himself. The fact is that longer maturities – even at lower interest rates – lead to higher interest payments.